The young banker at the center of Securities and Exchange Commission's case against Goldman Sachs, Fabrice Tourre will be in the hot seat today on Capitol Hill. The Senate Subcommittee on Homeland Security and Govermental Affairs has just begun its hearing titled, "Wall Street and the Financial Crisis: The Role of Investment Banks." It should instead be subtitled, "The Role of Goldman Sachs," as all seven witnesses are current or former Goldman employees. Tourre is on the first panel to be questioned by Senators. His prepared testimony (.pdf) makes crystal clear the defense Goldman intends to take in response to the SEC's allegations of fraud.
If you are unfamiliar with the Goldman-SEC case, a brief synopsis can be found at the top of this post.
IKB and ACA Were Sophisticated Investors
This serves as the buyer-beware defense. Tourre says that the two investors who lost a great deal of money on the transaction -- collateral manager ACA and German bank IKB -- were sophisticated investors who should have understood the risks of purchasing the securities at the heart of the SEC case. This point is important because it casts doubt on two questions. First, could ACA have reasonably been misled about hedge fund manager John Paulson's role as a short investor? Second, could IKB have been reasonably misled that the role of an independent collateral manager meant that no one else would have any influence on what might have went in the portfolio? If the answer to both of these questions is "no," then the SEC will have a very difficult time winning its case.